Current Projects


Forward Guidance at the Zero Lower Bound: Curse and Blessing of Time-Inconsistency (joint with Gregor Boehl)


Forward guidance as a tool of unconventional monetary policy can be highly efficient to support aggregate demand and to steer the economy out of the zero lower bound (ZLB). However, the effect that stimulates the economy can give rise to a time-inconsistency problem: if the central bank promises to keep interest rates at the ZLB for long, the subsequent increase in inflation and economic activity may create a motive for the central bank to forego its promise and to exit the ZLB earlier than announced. We illustrate the time-inconsistency problem in a New Keynesian model with hand-to-mouth consumers. Using a novel and analytically tractable method for handling occasionally binding constraints, we contrast the case of commitment to forward guidance with the case in which monetary policy allows for an early exit of the ZLB. Our method is able to provide results on uniqueness and existence of (ZLB) equilibria. We study the equilibrium selection given different scenarios and conclude that central bankers should be careful when choosing the number of periods with low interest rates in order to avoid the inconsistency problem. Furthermore, we calculate government spending multipliers and argue that the multiplier is even larger if combined with forward guidance.

draft upon request



Working Paper


The government spending multiplier, fiscal stress and the Zero Lower Bound


The recent sovereign debt crisis in the Eurozone was characterized by a monetary policy,

which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and

several countries, which faced high risk spreads on their sovereign bonds. How is the government spending multiplier affected by such an economic environment?While prominent results in the academic literature point to high government spending multipliers at the ZLB, higher public indebtedness is often associated with small government spending multipliers. I develop a DSGE model with leverage constrained banks that captures both features of this economic environment, the ZLB and fiscal stress. In this model, I analyze the effects of government spending shocks. I find that not only are multipliers large at the ZLB, the presence of fiscal stress can even increase their size. For longer durations of the ZLB,multipliers in this model can be considerably larger than one.


Keywords: government spending multiplier, zero lower bound , financial frictions

JEL Classifications: E32, E 44, E62, H30, H60


Current version: here



The government spending multiplier, fiscal stress and risk


According to a growing empirical literature the government spending multiplier appears to be relatively small in times of fiscal stress. I employ a medium-scale DSGE model with leverage constrained banks and sovereign default risk to analyze how the presence of fiscal stress can affect the transmission of government spending shocks. I find that the role of fiscal stress for the size of the government spending multiplier is negligible when analyzing the linearized economy.


Keywords: government spending multiplier, fiscal stress , financial frictions

JEL Classifications: E32, E 44, E62, H30, H60




Fiscal Retrenchment and Sovereign Risk (BDPEMS Working Paper Series WP_2015-07)


How does sovereign risk affect the dynamic consequences of identified contractionary government spending shocks? I apply a regime-switching SVAR on Italian data and find that in periods in which government bond yield spreads are high, cumulative government spending multipliers are smaller than in the calm regime. This empirical finding supports theoretical arguments that associate fiscal distress with low multipliers (e.g. Corsetti et al. (2013), Economic Journal). An additional result is that in the crisis regime, risk spreads increase after contractionary government spending shocks. This challenges the suggestion that declining risk premia are the reason for the attenuated output response in the crisis regime.


Keywords: government spending multiplier, sovereign risk, fiscal retrenchment, state-dependent multipliers

JEL Classification: E32, E62, E63, H60


Current version: here

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